Understanding Investors’ Relief

In the final part in our 4-part series on some of the tax-efficient investment strategies that help plan for and mitigate capital gains tax (“CGT”) liabilities, we’re looking at Investors’ Relief (“IR”) – an associate of Entrepreneurs’ Relief (“ER”).

Investors’ Relief

Billed as an extension to ER, Investors’ Relief will, once made available, in fact be a relief in its own right. As a further drive to encourage investment in private companies, complementing the SEIS and EIS investor reliefs previously discussed, IR will provide similar tax benefits to ER but with stripped back qualifying conditions.

The relief will be available in respect of disposals made from 6 April 2019 and, for eligible individuals, will provide a 10% CGT rate on qualifying disposals.

Qualifying disposals

As with all reliefs, in order for a disposal to qualify for IR there are a number of conditions that both the company and the investor’s shareholding must meet. In particular, two such conditions are what set this relief apart from ER:

First, the investor is not required to be an employee or officer of the company in order to qualify. In fact, quite the reverse, and only certain employees and directors will qualify for the relief.

Secondly, there is no minimum holding requirement and so any quantity of shares may be eligible for the relief.

There are no trade-specific or company size restrictions with this relief, and so, coupled with the easing of the two conditions above, IR represents an opportunity to attract external investment for those companies that may struggle to meet the more stringent conditions of SEIS and EIS.

Qualifying holdings

In addition to the two conditions above, the following must also be met:

Shares must be newly issued (i.e. not pre-existing shares purchased from a previous shareholder) and be issued in return for cash consideration

The new shares must have been issued on or after 17 March 2016

The new shares must also have been ‘ordinary shares’ on issue and remain so immediately before the disposal (i.e. they hold no preferential rights)

The company must be a trading company, or a holding company of a trading group

The company’s shares must not have been listed at the time the investor shares were issued

The shares must have been held by the investor continually for at least three years

Claiming IR

Like ER, claims for IR are time limited and so it is vital that they are made within the specified timeframe. The claim should be made on the self-assessment tax return relating to the year in which the disposal(s) is made. It therefore follows that a claim can be made within the ‘normal’ self-assessment return submission and repair deadlines, meaning that it is possible to make a claim by repairing a tax return within one year from its original submission due date.

Claims for IR are ultimately restricted by the “lifetime limit”, which is the maximum value of aggregated eligible gains that can qualify for the relief during a taxpayer’s lifetime. Like ER, the lifetime limit is £10m, but it is separate to that applicable to ER, so a claim for one shouldn’t jeopardise the prospect of making later claims for the other.

Planning opportunities

Unlike SEIS and EIS, Investors’ Relief, like ER, is claimed on a self-assessment basis by the investor and there is no requirement for directors to undertake advanced assurance procedures with HMRC in order to assure investors that their company is eligible.

With that in mind, businesses that fall outside of the SEIS and EIS schemes on the basis of their trade, such as property developers, for example, may find ER and IR useful incentives to attract cash, without necessarily having to build a relationship with their investor.

If you’re interested in understanding more about Investors’ Relief, or have more general questions about the disposal of business assets, contact us today for an initial, free-of-charge meeting.